Breadcrumbs

Lease-Purchase Financing of a Design-Build Project, The Plymouth County Correctional Facility, July 1997

The 1,140-bed Plymouth County correctional facility, which began operations in June 1994, was financed and built through a complex series of noncompetitive contracting arrangements authorized by special legislation waiving the statutory rules that normally govern publicly funded capital facility projects in Massachusetts. Project publicity has characterized this $115 million project as "a unique public/private partnership" that entails "virtually no risk to the taxpayers." The project's use of lease-purchase financing and design-build construction has been touted as an innovative, entrepreneurial approach enabling rapid construction of a state-of-the-art correctional facility yielding taxpayer savings of $426 million over the 30-year project financing period.

The enactment in December 1991 of special legislation authorizing the project was the culmination of years of effort on the part of Plymouth County officials and the private development team, a group of private firms that had invested substantial time and capital to promote the development project that became the Plymouth County correctional facility. The original development project had not included the Commonwealth at all: the private development team had spent more than a year negotiating a plan with the United States Marshals Service to build a federal detention facility on Plymouth County land. When these negotiations failed in mid-1991, the team’s efforts focused on involving the Commonwealth as well as the federal government.

The participants represented a wide range of disparate institutional interests and objectives. The private development team members wanted to reap the financial benefits of their unpaid years of effort. Plymouth County wanted to raise money to defray its operating deficit by developing the parcel of land used for the project and to replace the antiquated Plymouth County Jail and House of Correction with a larger, state-of-the-art facility. The Commonwealth and the federal government wanted access to prison beds for state and federal inmates housed in overcrowded facilities. This project was viewed by the participants as a vehicle for meeting all of these objectives. These objectives appear to have been met.

The project has been promoted by the participants as a privately financed venture entailing no risk to taxpayers, this characterization is misleading. The Commonwealth's taxpayers are paying for the Plymouth facility. Private investors would not have loaned the project more than $110 million without the Commonwealth's financial commitment to make payments sufficient to repay the loan. By the year 2022, the Commonwealth's taxpayers will have paid more than $303 million to cover debt service payments to the private investors; taxpayers will also foot the bill for operating costs, maintenance costs, and capital repairs to the facility.

The financial structure of the project did not adequately protect the interests of the Commonwealth’s taxpayers. The private investors' interests were protected by the terms of the Trust Agreement, which spelled out the rules for spending project funds. At the project closing, the private development team members recouped their investments in developing and promoting the failed federal detention facility proposal as well as the Plymouth facility project. Plymouth County officials, who had always viewed the project as a means of raising cash, maximized the payments to the County from project funds.

But the Commonwealth -- which assumed financial responsibility for the cost of all closing fees, payments to Plymouth County, and other project expenditures -- failed to make effective use of its leverage. In effect, the Commonwealth agreed to make lease payments covering the full project financing cost and allowed the Plymouth County officials and the private firms handling the financing to decide how to spend the borrowed funds. Including interest earned on these funds, project expenditures have exceeded $115 million. The Commonwealth's exposure to risk was heightened by Plymouth County’s creation of a "special-purpose corporation" to manage the project finances. The Plymouth County officials serving as Corporation directors while the Plymouth facility was under construction did not comply with the rules mandating public accountability and disclosure: their meetings were not open to the public, nor did they view the project records as public records. By forfeiting the opportunity to mitigate and control the risks inherent in this project, the Commonwealth opened the door to many of the problems documented in this report.

The lease-purchase method of financing the project enabled the construction of new state and county correctional beds to alleviate prison overcrowding at a time when the Commonwealth's ability to issue general obligation debt to finance new prison construction projects was severely restricted. But this financing method of financing the Plymouth facility was costly. In comparison with general obligation financing, lease-purchase financing requires a higher overall loan amount (to pay for capitalized interest and debt service reserve requirements), carries a higher interest rate , and entails substantially higher issuance costs. The issuance costs for the Plymouth facility included an exorbitant $5 million ground lease payment to Plymouth County and questionable fees to some private development team members.

The Plymouth facility’s small size and use of modular construction techniques were conducive to lower construction costs. However, the Commonwealth had no authority to oversee or approve the design-builder’s work, and the fast-track design-build process used by the design-builder restricted public access to key project information. Shortly after the Plymouth facility began operations, Plymouth County officials concluded that the facility’s administrative space was inadequate. Three years later, construction defects at the facility remained unresolved.

The fast-track design-build method of delivering the Plymouth facility has been promoted as a contracting innovation that has enabled more rapid delivery of a completed facility at a lower cost than the Commonwealth could achieve. The evidence does not support this claim. During the same period in which the Plymouth facility was designed and built, the Commonwealth built a new, 1,260-bed Hampden County Jail and House of Correction, using modular construction techniques, at a lower construction cost per square foot than the Plymouth facility and on a more rapid construction schedule than the Plymouth facility. Moreover, the Commonwealth achieved these results without waiving requirements for planning, competition, and oversight.

The methods used to finance and build the Plymouth are inherently more risky than the conventional financing and construction methods used by the Commonwealth for public construction projects. Because they entail higher risks, these methods require increased safeguards. The Plymouth case illustrates the consequences of employing these methods on a publicly funded project without strong, effective safeguards that protect taxpayer interests.

A complete list of the report’s findings is provided after the recommendations that follow.

Recommendations

To reduce the costs and risks associated with the Plymouth facility, the Inspector General offers the following recommendations to the Commonwealth, Plymouth County, the Plymouth County Correctional Facility Corporation, and the Legislature:

Plymouth County should recalculate and renegotiate the per diem rate charged to the United States Marshals Service to include the full debt service cost of the taxable certificates of participation.

The Executive Office for Administration and Finance should analyze the feasibility and cost-effectiveness of refinancing the Plymouth facility project with general obligation debt.

The Executive Office for Administration and Finance, the Executive Office of Public Safety, and Plymouth County should amend the Memorandum of Agreement to ensure that all interest earnings on project funds be spent on the Plymouth facility

The Executive Office for Administration and Finance should pursue with Plymouth County amendments to the Trust Agreement that would require that all surplus project funds revert to the Commonwealth at refinancing or at the end of the financing period.

The Corporation should transfer any remaining balances in the Construction and Acquisition Fund and the Administrative Expense Fund to the Capital Repair and Replacement Fund, as required by the Trust Agreement.

The Corporation should ensure its full compliance with the open meeting law, the public records law, and other applicable rules mandating public accountability and disclosure.

The Legislature should amend Chapter 425 of the Acts of 1991 to clarify that the statutory exemptions from advertising and bidding applied only to the initial construction of the Plymouth facility.

List of Report Findings

Finding 1. The Commonwealth is contractually obligated to pay the entire cost of financing the construction of the Plymouth facility over 30 years.

Finding 2. The Commonwealth is subsidizing the federal government's cost of housing federal inmates at the Plymouth facility.

Finding 3. Project publicity has not provided full or accurate information regarding the Plymouth facility's future financial impact on state taxpayers.

Finding 4. Plymouth County will receive at least $17 million in project funds and interest earnings from project funds during and after the 30-year financing period.

Finding 5. The project issuance costs included questionable fees to private development team members.

Finding 6. Project expenditure controls were weak.

Finding 7. The Commonwealth had no authority to oversee or approve the program, design, or construction of the Plymouth facility.

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